News & Commentary: BG Strategic Advisors and Benjamin Gordon on Logistics

NEWS &
COMMENTARY
Asian Emergence:
The Brave New World of Logistics
Mergers that Worked:
Lessons from the Logistics Leaders
Small 3PLs Make it Big
Logistics 2005:
Assessing the 7 Mega-Trends Changing the Industry
The Changing Face of 3rd Party Logistics
Logistics Acquisitions:
Who Says Elephants Can’t Dance?
by Benjamin Gordon
Managing Director, BG Strategic Advisors, Inc.
VOL 1

Asian Emergence:
The Brave New World of Logistics
By Benjamin Gordon
This article will highlight the global changes Asia is driving,
and the resulting winners and losers in logistics.
India and China: Getting Big Fast
To understand the changes in Asia, it is instructive to start with
China, since the US and China represent a combined 60% of
global trade.
Today, along with India, China stands at the epicenter of the
fastest-growing region of the world, otherwise known as the
“Asian miracle.” The two countries represent a population
of 2.2 billion. In addition, both are attracting foreign direct
investment, with China attracting $60 billion, and India
drawing $3 billion. Overseas firms like Yellow Roadway (YRC),
DHL, and GeoLogistics are attracted by the high growth
potential in India and China. The Indian logistics market
represents $15 billion, according to Frost & Sullivan, and is
growing at 7% annually. Meanwhile, China weighs in at $250
billion of logistics spend according to UPS, and is growing at
16% annually.
An important engine of growth is China’s 2001 acceptance
by the World Trade Organization (WTO). As a result, China
must now adhere to WTO’s rules, and is liberalizing rapidly. In
the past four years, China has reduced tariffs from 25% to less
than 10%. Continued legal changes will attract more overseas
investment and fuel accelerated expansion.
Another key driver of Asian logistics growth is the low level
of logistics outsourcing. Both China and India have under-
penetrated third-party logistics (3PL) markets. India’s 3PL
sector represents 3% of the country’s total logistics spend.
China’s 3PL sector represents just 2% of the country’s total
spend. In contrast, the United States’ 3PL sector is much more
penetrated, at approximately 10%. Europe is even higher, at
25%. Clearly the 3PL sector has a lot of room to grow.
A core reason for this low penetration in Asia is the low efficiency
in these markets. In the United States, over the past 25 years,
logistics costs as a percentage of GDP dropped from 17% down
to 9% due to a combination of government infrastructure
investments and high-growth, asset-light outsourcing logistics
companies. In China, logistics costs today represent 21% of
GDP. Today, in China and India, both of these dominant
trends in the US are also underway.
The governments of India and China are investing aggressively
to fuel accelerated growth. India, for instance, whose logistics
market is approximately 0.7% of the US logistics market,
announced plans for $17 billion in transport infrastructure
investment between the years of 2006 and 2010. In contrast,
the US just signed into law SAFETEA-LU, a $286.4 billion,
six-year spending plan for transportation infrastructure that
translates into 5% of its annual logistics market. Thus, on
a per-year basis, while the U.S. is investing 5% of its annual
logistics spend on infrastructure, India is investing over 4 times
as much, or 23%.
Asian business leaders see these trends and are responding by
seeking outsourcing solutions. A survey by Harris Interactive
and sponsored by UPS showed that Asian executives are seeking
to outsource at a rate three times faster than that of their US
Innovation was once viewed as the bastion of the United States. In 1790, George Washington authorized the first
U.S.patent,granting Samuel Hopkins the right to a new manufacturing method for potash. Today,216 years later,
both manufacturing and innovation have gone west,from the United States to Asia. As a result,we are in the midst
of a sea change that is revolutionizing not just the global economy,but also the logistics world.

and European counterparts. When asked whether they are
moving “very extensively” or “completely” to outsourcing,
29% of Asian executives said yes. In contrast, just 11% of
US and European executives agreed with this assertion. As a
result, logistics markets are opening up and growing rapidly
throughout China, India, and indeed much of Asia.
Impact on U.S.Logistics Markets
The impact of Asia’s ascendance on US logistics markets has
been swift.
First,manufacturinghasshiftedfrom
the US to Asia. In November 2005,
GM declared plans to slash 30,000
jobs in Canada and the United
States. Days later, GM announced
plans to add 450 workers in India,
and 200 staff in China. In the next
3 years, GM intends to raise auto
parts sourcing in India from $120
million today to $1 billion, and up
to $80 billion in China.
Second, carriers and freight
forwarders have gained significant
benefits. In November 2005,
three North American carriers
– American, Continental, and Air
Canada – initiated service to Delhi.
Third, the West Coast of the US has continued to register
record levels of demand. As Asian-based manufacturing is
shipped to the US for consumption, the ports of Los Angeles
and Long Beach are achieving record volumes. Los Angeles, for
instance, handled over 700,000 TEUs in the month of October
alone. In the coming year, China will originate over 48% of all
import freight into the United States, much of it via the West
Coast. California-based firms have grown correspondingly.
For instance, California-based freight forwarders GeoLogistics
and BAX Global have both completed successful turnarounds
in the past five years, expanding from unprofitable operations
in 2000-2001 to over $50 and $100 million in operating
profit, respectively, on the basis of dramatic Asia-US freight
forwarding growth.
Consolidation is Coming,in China and
Throughout Asia
The rapid ascent of China has caught the attention of global
logistics leaders.
In India, DHL purchased a 68% stake in Blue Dart, establishing
a foothold in the domestic courier and express marketplace.
FedEx and UPS are also strengthening their positions in the
country, and recently increased the number of flights in and
out of China. UPS also entered into an agreement whereby
it would acquire the express delivery agency business from
Sinotrans.
In China, over 150 M&A transactions have taken place with US
companies over the past decade. Companies like GeoLogistics,
YellowRoadway (YRC), and others have forged deals to enter
China. Historically, US companies seeking growth in Asia
have targeted the Western-friendly
markets of Hong Kong and
Singapore. Mainland China, after
all, didn’t even have a stock market
until 1990, and many of the core
assets of the country remain under
government ownership. In the case
of Yellow Roadway, the company
entered into an agreement with
Shanghai Jin Jiang International
Industrial Investment Co., Ltd.for
the formation of a China-based
transportation joint venture. Jin
Jiang is a publicly-traded company
based in Shanghai.
However, this acquisition approach
is changing rapidly, as companies target mainland China as
well as neighboring markets. According to MidMarket Capital
Advisors, two-thirds of Chinese companies’ acquisitions of
targets in the US have been conducted as 100% transactions
through Hong Kong entities. In contrast, two-thirds of US
companies’ acquisitions of targets in China have involved
majority investments in mainland China. This activity is
expected to continue to surge.
Implications for US Companies
For US-based companies, the implications are monumental.
On the one hand, companies that gain a successful foothold in
Asia can expect to see significant growth. US-based companies
like Expeditors, BAX Global and GeoLogistics now derive a
majority of their profits from Asia. In a market where logistics
companies were historically valued at 5-7 times operating
profit, or EBITDA, the high valuations (Expeditors trades at
close to 20 times EBITDA, BAX sold for 11 times EBITDA,
and GeoLogistics sold for 14 times EBITDA) reflect the
premium that markets and investorsplace on Asian growth
opportunities. Similarly, when PWC Logistics announced a
string of three acquisitions to strengthen its presence in Asia
Asian Emergence: The Brave New World of Logistics

in 2005, its market valuation skyrocketed from less than $2
billion to over $8 billion, in large part due to the premium
that investors placed on the company’s Asian expansion.
On the other hand, companies that overlook Asia do so at
their peril. Much like the European manufacturers of the
1800s, who found themselves supplanted by Samuel Hopkins
and other leaders of the US manufacturing golden era, US
companies today who fail to invest in Asia will eventually slip
behind. For example, Expeditors grew its market value by
20.3% over the past five years. In contrast, EGL, a firm with a
weaker Asian presence, grow its market value at half that rate,
or 9.5%. Smaller firms face an even more dramatic impact,
as freight forwarders with a subscale presence in Asia-US trade
lanes are finding themselves increasingly shut out of lucrative
markets by larger competitors.
Smart logistics companies have several options for responding.
Some, like BAX and GeoLogistics, sought mergers with the
global firms of Deutsche Bahn and PWC Logistics, respectively,
gaining resources to fund accelerated growth in Asia. Others
are raising capital in a bid to fund acquisition-led growth
while maintaining independence. What is clear is that every
US logistics firm needs a strategy for growth in what may be
known as the Asian century.
Implications for Asian Companies
For Asian companies, the choices are even more dramatic.
Most Asian logistics firms are at a crossroads.
Those that develop winning niche leadership strategies are
pursuing rapid growth, and in turn are attracting significant
interest from outside parties. Trans-Link, for instance,
established a dominant position in the event logistics and
specialty freight forwarding sector. With a commanding
market share of 80% in its target markets, Trans-Link drew
the attention of PWC Logistics, who bought the business and
promoted its senior management team into a more prominent
role with a multi-billion-dollar giant.
On the other hand, firms that fail to achieve meaningful
differentiation are at risk of falling behind. As global
competitors pour capital and resources into the Asian region,
mid-sized companies will enjoy growth in the short-term but
risk obsolescence in the long-term.
As a result, the smartest Asian logistics companies are preparing
for the coming wave of consolidation. Whether as buyers or
sellers, the leaders are getting ready to stake out their position
in a rapidly-changing marketplace.
Asian Emergence: The Brave New World of Logistics
Benjamin Gordon is Managing Director of BG Strategic Advisors,Inc. (“BGSA”),a leading global
investment banking and strategy consulting firm specializing in warehousing,logistics and supply chain
advisory services.For more information,please visit BGSA’s website at www.BGStrategicAdvisors.com,
contact Benjamin Gordon directly at Ben@BGStrategicAdvisors.com,or call BGSA at (561) 655-6677.

LogisticsQuarterly.com22 LQ™ June/July 2005
AS THIS COLUMN HAS NOTED in the
past, the logistics market is in the
early stages of a massive wave of
consolidation. Recent acquisitions
such as UTi/Standard, UPS/
Livingston, Kuehne & Nagel/USCO,
DHL/ SmartMail, and Reliant Equity/
Air-Road underscore this trend.
These transactions reflect three
major forces that are here to stay:
customer demand for integrated
solutions, new technologies that pro-
vide scale economies to large logis-
tics firms, and deep-pocketed
acquirers in pursuit of new targets.
However, not all acquisitions suc-
ceed. Recent studies indicate that as
many as 60 percent of all acquisi-
tions fail to create value in excess of
the purchase price. Given the contin-
ued pressures for consolidation, a
vital question emerges for logistics
CEOs and CFOs: what steps can you
take to maximize your chances of
success in a merger?
Fortunately, there are success
stories to draw on. A study pub-
lished in the March 2003 Harvard
Business Review shows that one
winning strategy is to engage in a
consistent pattern of multiple
acquisitions, through both good
times and bad. The study examines
7,475 acquisitions made by 724 U.S.
companies between 1986 and 2001.
The researchers found that the 110
“frequent buyers” – those firms that
bought more than 20 companies
during the 15-year period – outper-
formed infrequent buyers (those
that bought one to four companies)
by a 1.7:1 ratio, and decisively
By Benjamin Gordon
Mergers that Worked:
Lessons from the Logistics Leaders
Here’s an insightful look at acquisition and integration strategies
from the perspective of leaders in the field, and their reflections
on what this wave of consolidation is likely to yield.
Benjamin Gordon is Managing Director of BG Strategic Advisors, Inc.
His firm provides investment banking and strategy consulting services to companies in the logistics and supply chain industry.
For more information, please visit www.BGStrategicAdvisors.com, email Ben@BGStrategicAdvisors.com, or contact Ben at (561) 655-6677.

23LQ™ June/July 2005LogisticsQuarterly.com
beat non-buyers by a 2:1 ratio.
These “serial acquirers” demon-
strate common characteristics. They
tend to have a disciplined set of rig-
orous acquisition criteria; consistent
processes; a focus on both financial
and cultural metrics; stand-alone
merger and acquisition (M&A) staff;
and a feedback loop that enables
buyers to learn from both their wins
and losses.
Within the transportation and
logistics sector, two companies
stand out as examples of successful
serial acquirers: UPS and UTi. One is
a transportation giant with $37 bil-
lion in revenues, a market capitaliza-
tion of $70 billion, and 97 years of
history in the industry. The other is
a relative upstart, with gross rev-
enues of $1.4 billion, a market capi-
talization of $1.7 billion, and just
over a decade of history. Both are
serial acquirers who have achieved
top-quartile results, as reflected by
their market capitalization increase.
In the case of UPS, the company grew
16%, 18%, and 0 in 2002, 2003 and
2004, respectively, during a time
period when the S&P 500 declined. In
the case of UTi, the company sky-
rocketed 34%, 44%, and 52% over the
same three-year period! In both
cases, much of this growth resulted
from shrewd acquisitions.
To get a better understanding of
UTi and UPS’ M&A strategy, we inter-
viewed their senior leadership. We
were fortunate to get significant time
and input from UTi’s CEO Roger
MacFarlane, UPS Supply Chain
Solutions’ head of global health care
Bill Hook, and UPS Supply Chain
Solutions’ head of marketing Lynette
McIntire. Highlights from these inter-
views are presented below.
Post-Merger management
and Customer retention
An interview with UTi CEO Roger MacFarlane
regarding his firm’s acquisition strategy.
Acquisition Strategy
BG: UTi has successfully acquired
and integrated close to 20 compa-
nies in the last decade. What has
been the key to your acquisition
strategy?
RM: The first issue is ensuring you
are buying the right business. There
has to be a good cultural fit, in terms
of ethical standards of behavior, cus-
tomer-centric values, and other soft
criteria in addition to the hard ones.
Post-Acquisition Integration:
Entrepreneurial Management
Retention
BG: Entrepreneurial culture has
been a hallmark of UTi. How do you
preserve this as you buy businesses?
What do you focus on post-acquisi-
tion?
RM: The next issue is to make sure
you are strengthening your bench.
We are particularly keen on retaining
and developing management. We
treat them as if we’ve just hired
them. So we lay out very clearly what
their responsibilities are going to be,
and how they will interact with their
team. We focus on treating the
acquired company and its manage-
ment in a positive fashion.
What can frequently happen, par-
ticularly when you bring two freight
forwarding companies together, is
that a buyer thinks their manage-
ment is stronger, since they are the
buyer. We take the opposite
approach, and want to make sure
that our people consider the newly-
acquired management a big boost
to our team. This helps to ensure
that they are welcomed.
At the same time, the target com-
panies need to know that they
aren’t going to be micro-managed.
When we bought Standard, we were
focused on this issue. They were
used to entrepreneurial success. We
also want to show that we are
adopting some of their practices, so
they are accepted and contributing.
For instance, Bill Gates of Standard
has played a role in our strategic
leadership team. We did the same
with Continental and SLI leadership.
They bring fresh ideas and an entre-
preneurial infusion of energy.
The effect of this is that the com-
pany being acquired feels like a true
partner.
Customer Retention
BG: How do you maximize cus-
tomer retention?
RM: As far as customers are con-
cerned, we try to go out and visit
with customers as quickly as possi-
ble. Our competition likes to claim
that customers are vulnerable post-
deal, and we try to inoculate against
that by going out to meet with cus-
tomers. In most cases, the same
operational people are in place, so
we stabilize the situation.
So in line with that, we typically
do not change the name of the com-
pany, because it’s a symbol of what
the customer has become familiar
with. Not until the customers are
comfortable does that happen. This
takes anywhere from six months to
two years.
If you were buying a distressed
company, it would be a different
story. But we are focusing on high-
quality businesses.
Operational Integration
BG: What do you focus on to
ensure a smooth operational integra-
tion?
RM: This depends on the kind of
target. In the case of Continental,
where we had overlapping locations,
we focused on this from the ground
up. We delayed the acquisition clos-
ing by 30 days so we could install our
software/hardware and ensure suc-
cessful technology integration.
With a company like Standard,
which is more of a stand-alone entity,
we are more careful to avoid forcing
any operational integration too
aggressively.
Cross-Selling
BG: Are there significant opportu-
nities for cross-selling in your acqui-
sitions?
RM: We focused on this with
Standard. This is a key for post-
acquisition growth. But more impor-
tant is to ensure customer retention
and stability.
Transaction Structures
BG: How do you structure acquisi-
tions to maximize success?
RM: We like to have management
equity and an earn-out component,
so growth and cross-selling becomes
particularly important. And we invite
them to use the whole of UTi as a
source of new opportunities.

LogisticsQuarterly.com24 LQ™ June/July 2005
Earn-outs work when you have
operations that can stand on their
own and can be measured according-
ly. It is much harder if they are not
stand-alone operations.
With Standard, a classic earn-out
worked. With Continental, we had to
restructure the earn-out once we
integrated the operation.
Post-Acquisition Processes
BG: Is there a “UTi book” for post-
acquisition steps to take?
RM: We have a documented set of
steps. It isn’t exactly like “this after
30 days” or “that after 60 days” – it is
not highly-rigid, but it is a project
plan framework with milestones.
Some of the key things on which we
focus are:
• Management retention
• Customer retention
• Customer cross-selling
• Operational integration
• Benefit plans and HR integration
• Regular financial reporting
Lessons Learned and Pitfalls
BG: What has UTi learned from its
wins and losses?
RM: When we’ve had the right cul-
tural fit and personal chemistry,
we’ve been most successful.
If they have been already success-
ful, and we are simply providing
more resources, global footprint, etc
to make them more successful, that
has worked. We like to find strong-
growth companies that can do even
better with us. The thing we need to
do is provide the right level of sup-
port.
Pitfalls have occurred where we
have not really had the right manage-
ment. Another issue is the integrity
of the company you’re acquiring.
Whenever we’ve had a problem, it’s
been linked to this issue.
We did not do very well in Italy,
with an acquisition a while back, and
are still in litigation with the owner.
Various issues were not on the bal-
ance sheet, despite its being audited.
In the end, once the dust settled, the
seller had falsified the accounts. So
we had to terminate the relationship.
In short, the key is to ensure
you’ve done your homework on the
diligence upfront.
What Gets Measured
Gets Done
The UTi model is a case study of an
extraordinary blend of entrepreneur-
ship and rapid growth. In contrast,
while the UPS model has much in com-
mon, the company is particularly
focused on measuring and demonstrat-
ing quick results. To explore the UPS
approach, we interviewed UPS Supply
Chain Solutions marketing chief
Lynette McIntyre. To get the perspec-
tive of an acquired company, we also
spoke with Bill Hook, former leader of
Livingston and current head of the
UPS health care supply chain practice.
Acquisition Strategy
BG: UPS has purchased 26 compa-
nies in the past 4 years, including 16
just at the Supply Chain Solutions
group. What has UPS looked for in
these deals?
LM: UPS made a decision not to go
after complete, integrated players,
but to find unique players and fill
gaps in the network. We wanted not
just geographic reach but also
expertise. So we chose niche players
to fill in the strategy. For example,
Livingston gave us a Canada foot-
print but also an entry into the
healthcare market. This kind of a ver-
tical sector requires very specific
knowledge about regulations, licens-
ing, technology, and people.
Just Say No
BG: Part of successful acquisitions
involves knowing when to say no.
How did you decide to pass on deals?
LM: UPS has rejected companies
that didn’t fit the cultural model.
Companies that weren’t operations-
driven got dropped. Those that did-
n’t share same values and attitude in
terms of customer commitment,
quality, and importance of informa-
tion technology were not going to be
a fit. If the entrepreneur wants to
keep a separate silo, we are not going
to be interested.
Post-Merger Integration
BG: What are the keys to success
in the UPS post-merger model?
LM: We focus on several steps:
• Quick operational improvements
– make change happen fast.
• First observe. Then create a cross-
functional team where you mix up
people from the different units,
including both old guard and new
entrepreneurial teams as a change
team, with both viewpoints.
• Apply the 80/20 rule – inculcate the
company with UPS’ values, but keep
20% of the entrepreneurial fervor.
• Communicate, communicate, com-
municate. People need to know why
you are doing this. Keep them up to
date about the rationale, and make
them feel a part of something bigger.
BG: How do you process so many
UPS acquisitions simultaneously?
LM: The key is to have multiple
dedicated teams. Our M&A leader
was very busy. First we integrated
Sonic Air, a small same-day air
delivery company. The lessons
learned were important for subse-
quent acquisitions. Incrementally,
the knowledge kept building. And
we had one person, in the middle of
all of the processes, along with a
small, centralized team represent-
ing all of the major disciplines – HR,
operations, marketing, and sales.
They had full autonomy to make
key decisions with respect to inte-
gration. So when we got to Fritz, we
had the benefit of looking at it and
being able to put the processes in
place.
Customer Retention
BG: How do you keep customers?
LM: Customers start to see a bene-
fit from wide arrays of capabilities
UPS provides. They may have 10-15
customs brokers, another for ware-
housing in each market, for trans-
portation, and others. They can start
to consolidate services so we can
provide more value. Because UPS is
so huge, and has such a broad array
of capabilities, we can share a lot of
best practices information. We also
seek to ensure customer care is not
disrupted. In some cases, customers
get moved to other buildings and/or
operations, to ensure there is no dis-
ruption.
Management Retention
BG: How do you ensure newly-
acquired managers stay involved?

25LQ™ June/July 2005LogisticsQuarterly.com
LM: All new employees gain. First,
smaller companies generally find
that moving to UPS benefits provides
an advantage, in terms of better pen-
sion plans and access to UPS stock.
We also provide opportunities for
career development and advance-
ment. Up to 80% of our promotions
come from within.
In addition, rising stars get incen-
tives. This may include financial
incentives, lots of senior attention,
formal orientation and training pro-
grams, and a formal career develop-
ment planning process. We also pro-
vide a broad mix of exposure. You
can have 5-10 different major roles at
UPS.
Expatriates go through a process.
At first they are wildly enthusiastic
about new opportunity; then they
become disgusted with it all
because it’s not all there; and then
finally they enter a phase of accept-
ance/equilibrium. New people go
through the same phases. If they
stay through the disgusted phase,
then they find their place and real-
ize the opportunities.
Measurement
BG: Bill Hook, you lived through
the acquisition of Livingston by UPS,
and went from running the Liv-
ingston business to all of UPS’ global
health care practice. What was the
transition like for you?
BH: The key was to measure the
right things. We measured three
issues: financials, people, and cus-
tomers. Our joint goal was to ensure
success on all three fronts. Here’s
how we did:
• Financials – we measured revenue
targets, productivity, sales costs,
integration budget, and general/
administrative costs (to prior and to
budget). We hit our revenue growth
target.
• People – the keys were low unwant-
ed turnover and highly-positive
employee survey feedback. Turnover
was 10% pre-acquisition, and below
10% post-acquisition. We actually
improved our retention!
• Customers – we tracked client
retention (no unwanted churn). It
had been 8% before. After the UPS
merger, it actually dropped to 4%!
Management Retention
BG: What did UPS do on day one to
get management buy-in?
BH: Post-merger, UPS brought a
senior manager into the company
immediately. This did two things.
First, it signaled a new direction.
Second, it injected strategic thinking
and broke down barriers quickly, to
acclimatize Livingston people to the
new world. In situations where this
isn’t done, often the acquired compa-
ny doesn’t sense how it is supposed
to change and evolve. Clear parame-
ters helped, so everyone knew where
they were marching toward.
I also think speed is a cornerstone.
The timelines for the integration
were quite quick, for structural
changes within the company. It got
everyone over the change and uncer-
tainty quickly and decisively, even if
everyone didn’t agree in full.
Communication was another key.
When you are dealing with pension
and benefits, and compensation pro-
grams, rumors spread and uncertain-
ty can cause problems. UPS commu-
nicated everything clearly. Similarly,
it was important to convey the same
to customers.
UPS also did a great job of recog-
nizing the strength of the acquired
company. When we moved forward,
they made clear that the core value
they were acquiring was based on
the people, and they didn’t want to
harm that value. So a first step was to
identify best practices on the side of
the target.
Customer Retention
BG: How did UPS ensure customer
retention?
BH: The key was quick results – we
wanted to show customers that we
could cross-sell and implement fast.
We also changed roles quickly, clear-
ly and decisively. Identifying the
right structure and putting people in
place quickly was a key.
The UPS people who were injected
into the business started by going out
to meet customers. They also did lots
of site visits. This demonstrated that
UPS was serious about caring about
its key stakeholders. They followed up
with a substantive employee survey.
This gave all employees the chance to
do an online survey, identify areas of
concern, and assess how the business
has gone over the 18 months of post-
merger integration. By the second
one, six months later, there was a 10%
improvement in U.S. scores.
The Post-Merger Process
BG: What was the integration
process like? What key steps did UPS
take?
BH: The integration took a year.
But most of it had to happen in the
first six months. There were things
like name changes and benefit pro-
grams that take a while. There was
an integration project leader, and a
sponsor as well. There were teams
for customers, for employees, for IT,
for the name change, and several
others. Each used the same format in
terms of project management. They
developed their milestones and
reported on them to the steering
committee. The teams were cross-
functional and cross-company (both
target and acquirer).
There was a major transition from
the entrepreneurial Livingston world
to the regimented UPS world. So we
held a 2-day off-site with the senior
management teams.
Lessons Learned
BG: Were there any unwanted sur-
prises?
BH: The windup of pension plans
and other benefits was more compli-
cated than we had expected.
In many cases, we had complex
decisions to make. But speed is
everything. The longer you drag
things out, the more you delay
inevitable, difficult decisions. Get it
over early, and get it over quickly.
Conclusions
Consolidation is here to stay in the
logistics market. Serial acquirers like
UTi and UPS demonstrate that,
despite the fact that over 60 percent
of all mergers fail to create lasting
value, it’s possible to use acquisi-
tions as a successful mechanism for
profitable growth. These comments
from two firms with successful track
records in M&A suggest that there
are common principles that can be
followed.

13
STRATEGIES FOR GROWTH
By Benjamin Gordon
Small 3PLs Make it Big
The logistics market’s high growth and fragmentation evidences it is in the early
stages of a massive wave of consolidation that will transform the industry. As
logisticians and senior-level executives plan for the future it’s more important than ever before that they’re
mindful of this fast-changing landscape. Here’s an insightful overview of what lies ahead.
THE LOGISTICS MARKET is experienc-
ing a new pattern: the collapse of the
middle.
At one end of the spectrum, large
logistics companies are getting larger.In
the past three years,we have seen a wave
of acquisitions: UTi acquired Standard
Logistics.Kuehne & Nagel bought USCO.
UPS purchased both Fritz and Mailboxes
Etc. Not to be outdone, Deutsche Post
bought AEI,Danzas and Airborne.
It would seem that small companies
would have little hope of competing
against such multi-billion-dollar behe-
moths. In fact, at the other end of the
spectrum, a surprising trend has
appeared.While many small companies
have struggled, a few have emerged as
big winners. This column is about the
success stories of those smaller logistics
companies,and the implications for oth-
ers in the industry.
The Case for Consolidation
The logistics market is undergoing a
sea change.We are in the early stages of
a massive wave of consolidation that will
transform the industry. This powerful
change is rooted in the market’s high
growth and fragmentation.
As Table 1 shows,the logistics market
comprises several categories: value-
added warehousing, air/ocean freight
forwarding, asset-light transportation
management,and asset-based dedicated
contract carriage. Each segment has
grown at 15-25 percent annually over the
past decade,and is likely to continue to
do so. Furthermore, each segment is
highly fragmented. In all cases, the mar-
ket share available for small companies
(defined as those which are not top-50 in
their segments) is above 30 percent,and
in the case of warehousing is over 75 per-
cent.
As growth inevitably slows,the largest
logistics companies are pursuing acqui-
sitions. This is for three reasons. First,
Fortune 1000 customers are increasingly
seeking to reduce the number of logistics
suppliers they use. Second, new tech-
nologies make it possible to manage
companies’ logistics needs more cost-
effectively, as the Menlo-Vector and KN-
Nortel examples show.Third,outside cap-
ital is serving as a force multiplier,accel-
erating the growth rate of new ideas.
The Mid-Market Opportunity
The bad news for small and mid-sized
logistics companies is that larger compa-
nies are deploying their deep pockets to
boost their market shares. The good
news is that many of the most com-
pelling growth opportunities lie in the
mid-market.
As adoption levels approach satura-
tion for the largest companies in the
industry,the mid-market is emerging as
a source of major growth potential.
Table 2 shows that companies in the
Fortune 100 are already fully-penetrat-
ed, with over 70 percent using out-
sourced logistics services. In contrast,
companies in Fortune 401-500 are just
over 20 percent penetrated. As a con-
sequence, the Fortune 100 are only
likely to see outsourced logistics
spending growth of 8 percent,whereas
outsourced logistics expenditures for
companies in Fortune 401-500 are like-

14
ly to grow at 20 percent annually.
Consequently,the stage is set for 2004
as a year of growth for niche-oriented,
mid-market-focused logistics firms.
Small 3PL Success Stories
Within this market,how can mid-sized
logistics companies respond?
Based on our research, I would sug-
gest that several companies are poised
to take the stage,by virtue of their focus
on high-growth mid-market segments.In
particular, logistics firms which have
achieved leadership within protected
niche markets are likely to be especially
successful. Three types of niches look
particularly attractive: vertical solutions,
cross-border services, and post office
logistics.
Vertical Solutions
One example of a winning mid-mar-
ket strategy revolves around vertical
solutions. On the surface, this may
appear counter-intuitive, since many
companies focus on different vertical
markets.However,the true giants of value
creation in the logistics sector have
developed pure-play, highly-differentiat-
ed offerings that are tailored uniquely to
customer segments.
For instance, USCO Logistics was
slightly better than break-even in prof-
itability in 1996. When new CEO Bob
Auray came on board the following
year, he molded the business around
the high-tech and telecom sectors,
developing tailored technologies and
business services for clients such as
Sun and Nortel. Within four years,
USCO shot up to close to $40 million in
cash flow or EBITDA, before selling to
Kuehne & Nagel for approximately ten
times EBITDA. Similarly, CTI command-
ed a premium valuation of 14 times
EBITDA when it sold to TPG, in large
part because of its niche leadership
within the automotive sector. As these
examples demonstrate, vertical solu-
tions can provide tremendous value to
shareholders.
Today,PACAM is an example of a com-
pany focused on vertical solutions for
the liquor industry. As the #1 logistics
provider to this niche,PACAM has devel-
oped a set of customized services
including Foreign Trade Zone designa-
tion, co-packing, value-added warehous-
ing,and transportation for the liquor dis-
tribution market.Although a small com-
pany, PACAM has leveraged these capa-
bilities to achieve over 20 percent annu-
al growth for the past decade,competing
successfully in head-to-head battles
against multi-billion-dollar logistics com-
panies.
Cross-Border Services
Another category poised for growth is
cross-border services. Over the past
decade, US exports to Canada have
grown at 10 percent annually. Last year,
over 10 million trucks crossed the
US-Canada border, as the U.S. imported
$211 billion from Canada and exported
$161 billion.Similarly,truck crossings on
the U.S.-Mexico border grew from 2.8
million in 1995 to 4.4 million in 2002,as
both exports to and imports from
Mexico more than doubled over the
same time period. As U.S. companies
continue to expand trade with NAFTA
neighbors, and as security regulations
create increased complexity in terms of
compliance, cross-border services will
provide expanding opportunities for
innovative logistics companies.
Air Road Logistics is an example of a
specialist logistics firm, focused on US-
Mexico logistics services for automotive,
consumer electronics, retail and indus-
trial companies. Air Road was recently
acquired by Reliant Equity Investors, in
partnership with former Wal-Mart logis-
tics executive Steve Robinson.They were
excited about Air Road's niche leader-
ship, and saw an opportunity to expand
the company's services into new geogra-
phies (NAFTA-wide, including Canada)
and services (including dedicated, bro-
kerage, and inventory management
(VMI)).This asset based company really
gets supply chain and is uniquely quali-
fied to deliver outsourced services in
support of NAFTA driven logistics opera-
tions.
Unicity Integrated Logistics is an
example of another type of cross-border
specialist, serving as a Canadian plat-
form for U.S.-based Fortune 500 compa-
nies. Unicity provides Fortune 500 com-
panies with a Canadian supply chain
and logistics platform,either for (a) out-
sourcing their manufacturing operations
to Canada,or (b) distributing their prod-
ucts into the Canadian marketplace.The
company has grown at over 20 percent
annually and should continue to be a
leader in this category.
Post Office Logistics
The United States Postal Service is the
nation's largest transportation entity. It
delivers to a mind-boggling 130 million
addresses per day.The USPS designed a
Work-Share Initiative in the mid-1990s to
better manage the high volume densities
received from direct mailers. It sought
partners who would shoulder the
responsibility of handling linehaul trans-
portation of mail freight, thereby
enabling the USPS to focus on its core
competency of "final mile delivery." This
outsourcing shift created an enormous
market opportunity for creative trans-
portation companies who took the time
to understand the magnitude of the post
office logistics operations.
SmartMail Services responded with
an innovative business model that has
grown rapidly since its inception in
1996. Maximizing the strength and effi-
ciencies of the USPS, SmartMail offers
delivery services for catalogs, flat-size
mail pieces, and parcel packages. The
company built 16 processing centers
nationwide and designed each facility
to quickly and efficiently process mail
pieces in a highly secure environment.
Delivery options include expedited air
and budget ground. Service features
such as on-line tracking and reporting,
address verification, ZIP code correc-
tion and selective routing offer mailers
greater control over their deliveries.
According to CEO Jim Martell, "The
broad range of services we offer high
volume mailers and shippers give
them delivery options they didn't have
ten years ago. The density we achieve
in our processing centers allows mail-
ers to shave millions off of their ship-
ping costs without compromising
delivery times." Since its founding in
1996, SmartMail has grown to over
1,200 customers and $200 million in
revenues, and is likely to continue to
expand.
Ultimately, the smartest small compa-
nies are pursuing one of two paths: (1)
scale up through niche market leader-
ship,invest in technology,and execute a
differentiated strategy, or (2) sell to one
of the many motivated buyers that cur-
rently exist in the logistics marketplace.
Companies can succeed in either sce-
nario.The key is to make a clear decision
as to which path to pursue.
Benjamin Gordon is Managing Director
of BG Strategic Advisors,Inc.His firm pro-
vides investment banking and strategy
consulting services to companies in the
logistics and supply chain industry.
For more information, please visit
www.BGStrategicAdvisors.com.

2005 has been a banner year for the
third party logistics sector.
The logistics market continued to ex-
pand in nearly every respect. Ware-
housing, freight forwarding, truck broker-
age, dedicated contract carriage, and a
broad range of niche logistics segments
all exhibited growth in excess of 10%.
In the public marketplace, Eagle Global
Logistics and Landstar forecasted earn-
ings growth in excess of 20% for the
next years, as did UTi, Expeditors, and
C.H. Robinson.
Why, then, are stock market valuations
retreating? After skyrocketing 58% in
2004, the basket of non-asset forward-
ers (UTi, Expeditors, and C.H. Robinson)
was actually down 1% in 2005 year to
date. Similarly, Eagle and Landstar were
down 31% and 23%, respectively. What
explains this anomaly?
On balance, market valuations remain at
or near record highs. For instance, the
basket of non-asset forwarders is trading
at 29 times 2005 net earnings, and at
16 times 2005 earnings before interest,
taxes, depreciation, and amortization
(EBITDA). This high valuation level re-
flects the strong threshold of confidence
that investors continue to place in these
firms. At the same time, a number of
clouds are appearing on the horizon,
threatening to dampen the strong histor-
ical performance that top logistics firms
have achieved.
As a result, the logistics market is in the
midst of competing pressures, reflect-
ing both opportunities and challenges.
These top seven mega-trends are out-
lined next.
Assessing the Seven Mega-Trends
1. ASSET-LIGHT FORWARDING: WILL THE PARTY CONTINUE?
The asset-light forwarding sector continues to exhibit powerful growth, particularly in
the all-important Asia-North America trade lane. For instance, Expeditors’ first quarter
revenues were up 19% over the equivalent period in 2004. This represents a slower
growth rate than Expeditors has achieved historically, however.
Similarly, the ocean-forwarding category pulled ahead of the air-forwarding market,
reflecting the continued cost sensitivity of shippers. This divergence in market demand
is causing some firms to falter. Eagle’s net profit is down 2%. Although Wall Street ex-
pects Eagle to recover and continue at a 20%-plus growth rate, the past quarter raises
questions.
2. ASSETS: A RISING TIDE LIFTS ALL BOATS…
The conventional wisdom has long maintained that an asset is an albatross to be
avoided whenever possible. However, the past year demonstrated the benefits of
owning assets in capacity-constrained markets. Neptune Orient Lines, for example,
achieved a 16% jump in year-over-year profits. As President John F. Kennedy once
put it, “a rising tide lifts all boats.”
Much of this growth is attributable to the explosion of demand for Asia-US supply
chain services. It will be critical to observe whether steamships flood the market with
capacity in the coming two to three years, pulling down prices, as has happened his-
torically. For the moment, it’s a great time to own assets in the shipping sector.
3. … BUT IN COMMODITY BUSINESSES, ASSETS STILL SUFFER
Perhaps a better way to rephrase the conventional wisdom is that assets outperform
when capacity is scarce, and under-perform when the reverse is true. In the trucking
sector, a chronic oversupply of capacity is plaguing the less-than-truckload (LTL) cate-
gory. Central Freight is losing money, for instance, and considering asset sales to
shore up its balance sheet.
It’s worth noting that the company’s market capitalization is approximately $55 million.
Meanwhile, its real estate has been appraised at $103 million. In other words, investors
are valuing the operating company at negative $48 million! This, on the heels of the
Consolidated Freightways bankruptcy and the consolidation of USF and Roadway into
Yellow, reflects the dim view investors hold on the LTL sector.
In the truckload (TL) sector, the industry has not seen the same kinds of problems. But
the combination of skyrocketing fuel costs, insurance, and driver shortages make for an
unholy trinity. According to the American Trucking Association (ATA), we are experienc-
ing a shortage of 20,000 truck drivers today. If nothing is done, this is forecasted to
spike to 111,000 by 2013. While trucking companies have enjoyed a year of growth,
inevitably these pressures will create inflation, which could squeeze future profits.
4. INTERMODAL: A LOW-COST SOLUTION
If the preceding is enough bad news to give you an ulcer, the good news is that lower-
cost logistics models are gaining traction. A prime example is intermodal.
Increasingly, companies are seeking to combine inexpensive rail service with short-haul
trucking. Railroads Burlington Northern Santa Fe (BNSF) and Canadian Pacific (CP)
have been prime beneficiaries, relying on intermodal for 34% and 28% of their total
revenues, respectively. From 2002 to 2004, the number of domestic intermodal load-
.slanoisseforPtnemeganaMniahCylppuSfolicnuoC5002thgirypoC©

by Benjamin Gordon
Benjamin Gordon is a CSCMP
member and Managing Direc-
tor of BG Strategic Advisors,
Inc. in Palm Beach, Florida.
His firm provides investment
banking and strategy consult-
ing services to companies in
the logistics and supply chain
industries.
ings has grown from 10.5 million to 13 million, reflecting an 11% annual growth rate.
Meanwhile, BNSF’s intermodal revenue is up slightly higher, at 12% year over year,
reflecting the fact that they are gaining share at a faster clip.
5. TECHNOLOGY: ADOPTION CONTINUES
Technology analysts tend to view the technology market from extreme perspectives.
Adoption is characterized as either dramatic or nonexistent. In reality, new technologies
are being adopted, but at a slower rate.
In radio frequency identification (RFID), new capabilities are being rolled out, vertical by
vertical. In the pharmaceutical sector, where the underlying products’ high value justi-
fies more aggressive spending, Project JumpStart appears to have been a success.
During an eight-week trial period, 13,500 pharmaceutical packages were shipped,
tracked, and traced. Participants included Abbott, Barr, Cardinal Health, CVS, J&J,
McKesson, Pfizer, P&G, and Rite Aid. Proof of concept was accomplished, as the
project team read 98.6% of case tags and 96.8% of unit tags inside a case.
Meanwhile, the real technology adoption is taking place on the web. Online models
continue to exhibit lower-cost, higher-service characteristics. At Seko, a global freight
forwarder, online shipping volume surged five times, to 25% of its total revenues in just
one year. Similarly, at DHL, the company estimates that each electronic invoice saves
$1.80. Online pick-up requests save $2 versus phone calls. And online payment cuts
time to collect from 40 days to one day. Web-based technologies are continuing to
deliver powerful savings and benefits to customers and operators.
6. MERGERS MARCH ON: BOUNDARIES BLUR BETWEEN GEOGRAPHIES AND
SERVICES
The level of merger and acquisition (M&A) activity in the logistics sector continues to
expand to all-time record highs. In the past year, we witnessed such high-profile deals
as the acquisition of Tibbett & Britten by Exel, the acquisition of Unigistix by UTi, the
acquisition of NewBreed by Warburg Pincus, and the acquisition of Ozburn-Hessey
Logistics by Welsh Carson. Customers are increasingly pressing for such transactions,
as they simplify the number of logistics providers required to serve them.
We can disaggregate the M&A trend into two core components:
• PBB Global Logistics recently acquired Unicity Integrated
Logistics and Unicity Customs Services. A primary reason for this move was to
strengthen PBB’s position as a leading, cross-border specialist, and to concentrate
on the 10% US-Canada cross-border transportation growth.
Similarly, Yellow’s acquisition of GPS reflects its view of the importance of the Asia-US
trade lane. Meanwhile, European firms continue to look for US opportunities, attract-
ed by the relatively high-growth potential in North America: 15% annual growth ver-
sus 2% in Europe.
• The most common trend in M&As over the past five years has
been the convergence of warehousing and global freight forwarding. Transactions
such as Kuehne & Nagel-USCO, UTi-Standard, UTi-Unigistix, and APL-GATX reflect
this pattern. This year, PWC Logistics’ acquisition of Trans-Link and TransOceanic
showcased the desire of a regional warehousing firm to transform itself into a global
multi-service solutions provider.
7. CLO FOR HIRE: THE LOGISTICS
FUNCTION IS GROWING IN
IMPORTANCE
Historically, logistics executives were
treated as a secondary function within
organizations. This is all changing. In a
world where the world’s largest company
(in revenues), Wal-Mart, selects a CEO
who rose through the ranks of the organ-
ization’s logistics division, the market is
increasingly valuing the importance of
supply chain executives.
In a recent poll, over 70% of CEOs sur--
veyed by UPS-Harris Interactive called
supply chain management “very” or
“extremely” important. Of particular
note is the recruiting world. Motorola
lured Stuart Reed from his position as
IBM vice president of manufacturing to
become senior vice president of global
supply chain, reporting directly to CEO
Ed Zander. This is a sign of the increased
importance firms are attaching to logis-
tics.
In sum, it has been another growth year
for the logistics sector. However, as these
competing trends continue to play out,
the gap between the winners and the
losers will continue to widen.
For logistics providers, it will be increas-
ingly important to assess the market and
invest in new capabilities. For logistics
users, it will be crucial to evaluate your
logistics providers and ensure they will
be among the winners. And for logistics
investors and acquirers, there will be
continued opportunity to seek attractive
niche businesses. �
This article appeared in the Council of Supply Chain Management Professional’s newsletter, Supply Chain Comment, Volume 39,
Nov./Dec. 2005 Supply Chain Comment is published six times a year by CSCMP.

50 S U P P L Y C H A I N M A N A G E M E N T R E V I E W · M A R C H / A P R I L 2 0 0 3 www.scmr.com
The Changing Face of
By Benjamin H. Gordon
The third party logistics (3PL)
industry is undergoing a huge
transition. Currently competing
in a highly fragmented, high
growth market, 3PL providers
will soon be swept up in a mas-
sive wave of consolidations. This
trend will be driven by three fac-
tors: the increased demand for
lead logistics providers, the emer-
gence of new technology, and an
increase in cash-rich buyers seek-
ing logistics targets. Shippers
need to start scrutinizing their
3PLs and decide how well these
providers are positioned to sur-
vive in the new era.
e are living in an unprecedented time of consolida-
tion in the supply chain management industry. In the
past three years, we have witnessed such mega-merg-
ers as Deutsche Post-AEI-Danzas, UPS-Fritz, Kuehne
& Nagel-USCO, and Exel-Mark VII. The conventional
wisdom holds that these large deals, which were all com-
pleted from 1999 to 2001, are a relic of history and that
no mergers of this magnitude remain to be done.
But I will argue that the exact opposite is true. The logistics industry
is actually in the early stages of a massive wave of even greater consoli-
dation that will reward a small number of third-party logistics (3PL)
companies with tremendous value. As shippers look to simplify their
vendor base, as new technology allows large 3PLs to serve the midmar-
ket cost effectively, and as acquisitions and investment capital fuel the
growth of leading service providers, a handful of “mega-winners” will
come to dominate the 3PL marketplace.
These developments will also have a major impact on how 3PL users
select and use their service providers. Smart shippers already treat their
3PLs as true business partners. They integrate 3PLs into their business
and rely on them for critical supply chain functions. Given this depen-
dency, it’s all the more vital for shippers to understand their 3PLs’ long-
term viability amidst a rapidly changing marketplace.
As the 3PL landscape shifts, who will be the winners? How should
users of these services respond? This article provides some answers, lay-
Benjamin H. Gordon is managing director of BG Strategic Advisors, which
provides advisory services in strategy, technology, and finance to logistics
and supply chain companies.
3
rd
PARTY
LOGISTICS
W
TERRYALLEN
VALUE VISIBILITY EVOLUTION EXECUTION STRATEGY SYNERGY

ing out a roadmap to help both
providers and users of third-
party services navigate a dynam-
ic 3PL market.
An Industry in
Transition
Modern third-party logistics
providers have emerged recently as
a result of transportation deregula-
tion in the 1980s and the shipper
emphasis on “core competencies” in
the 1990s. As a result, outsourcing
has taken off. In the last decade,
according to research by invest-
ment banker Lazard Freres and
BG Strategic Advisors, the 3PL
category has grown at a rate
greater than 20 percent per year. It
has produced stock market darlings
like Expeditors, CH Robinson, and
Landstar. And it has spawned an
entire industry of small and midsized
logistics providers — which number
approximately 1,000 today.
Many observers have predicted that the
logistics provider industry will continue to
expand at a rate of 15-20 percent annually.
A recent Lazard Freres study shows that
M A R C H / A P R I L 2 0 0 3 51

Third Party Logistics
while 37 percent of high-volume
shippers outsourced transportation
in 2000, 73 percent expected to do
so by 2005. As the outsourcing
trend continues, the 3PL industry
will benefit.
Less frequently noted is the
enormous fragmentation in the
logistics industry. Exhibit 1 shows
that all four of the core logistics sec-
tors—warehousing, transportation
management, air/ocean freight for-
warding, and dedicated contract
carriage—are growing at a rate of
15-25 percent annually. Yet the
exhibit also shows that the market
share available for small companies
(defined as all companies below the
top 50) is between 30 and 80 per-
cent. To put this in perspective, the
parcel industry is growing at 4 per-
cent, and the market share available
for small companies is zero.
This combination of high growth and high fragmentation
makes the logistics industry ripe for consolidation. A growing
market supports a broad range of successful companies that
attract expansion-minded buyers. At the same time, fragmen-
tation translates into a plethora of small acquisition opportu-
nities for larger, cash-rich companies. Further, as the market
inevitably matures, businesses that were used to 20+ percent
growth will likely supplement their organic operations with
acquisitions.
Within the individual sectors of the logistics industry, no
one player dominates. For example, Exhibit 2 shows that
Danzas/AEI, holds 60 percent of the revenues generated by
the top seven companies in the sector of air and ocean freight
forwarding. However, if the chart were to be expanded to
include the U.S. revenues for all global freight forwarding
companies, Danzas/AEI’s market share would drop to less
than 25 percent. Further, when calculated as a percentage of
the overall logistics market, its true market share would drop
to just six percent. The chart also shows that only two compa-
nies have greater than 2x relative market share in their sec-
tors—Exel in warehousing and Danzas/AEI in freight for-
warding. But even those two combined enjoy less than ten
percent market share in the overall outsourced logistics mar-
ket.
Historically, winners have stayed in their corners.
Danzas/AEI enjoys strength in freight forwarding, Schneider
and Penske head up asset-based transportation, Exel stands
out in warehousing, and various players compete for leader-
ship in asset-light surface transportation and software. No
one company currently enjoys a top-two market share posi-
tion in more than one sector.
In the last three years, however, consolidation in the
industry has accelerated across both modes and geographies
(see Exhibit 2). Domestically, the UPS acquisition of Fritz
allowed the transportation and warehousing giant to add
expertise and scale in a new mode (freight forwarding).
Similarly, the Exel acquisition of Mark VII enabled a ware-
housing and freight-forwarding leader to add domestic sur-
face transportation management. By the same token, global
powerhouses have sought to acquire platforms in the United
States. Deutsche Post’s purchase of AEI/Danzas, Kuehne &
Nagel’s merger with USCO, and APL’s acquisition of GATX
all reflect this cross-geography trend.
The Consolidation Drivers
There are three main sources of this powerful consolidation:
shippers’ quest for lead logistics providers (LLPs), new game-
changing technologies, and the emergence of deep-pocketed
logistics acquirers.
The Shipper Quest for LLPs
First, shippers’ need for greater accountability and control
over their outsourced activities has given rise to a new type of
logistics management company — the lead logistics provider
(LLP). These large LLPs are emerging as the “supply chain
masters” for their customers. They offer shippers a wide
range of outsourcing services through a single point of con-
tact. They also provide broad geographical coverage as well as
sophisticated technology capabilities. Typically, the LLPs rely
on a network of smaller 3PL subcontractors to deliver these
services.
Pioneers in using LLPs include giants such as General
Motors and Nortel, which both chose recently to outsource
billions of dollars in logistics spending. GM sought an LLP
EXHIBIT 1
The Logistics Market Today:
High-Growth but Extremely Fragmented
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
0% 5% 10% 15%
Annual Market Growth Rate
20% 25% 30%
AvailableMarketSharefor
CompaniesBelowTop50
Source: Armstrong & Associates, BG Strategic Advisors Analysis
Slow-Growth,
Fragmented
Slow-Growth,
Consolidated
High-Growth,
Consolidated
Parcel
High-Growth,
Fragmented
Air/Ocean
Value-Added
Warehousing
Transportation
Management
Dedicated
(DCC)

www.scmr.com S U P P L Y C H A I N M A N A G E M E N T R E V I E W · M A R C H / A P R I L 2 0 0 3 53
with the technology capabilities to cut dealer order-entry
cycles from 60 days down to 15. (See the sidebar on page
56.) Nortel was looking for a logistics partner to help it free
up hundreds of millions of dollars in working capital and
inventory.
Few companies can meet the broad range of requirements
demanded by these large initiatives. Those that can possess a
broad range of capabilities, including:
� Multimodal expertise across services including truck-
load, less than truckload, intermodal, air, ocean, and ware-
housing.
� Global geographic scope across all locations relevant to
the client’s supply chain.
� Complex management skills to perform “master con-
tracting” solutions, where the LLP manages other, smaller
3PLs in subcontracting relationships.
� Analytical know-how to provide shippers with a
thoughtful, strategy-led approach that identifies opportunities
for outsourcing to add value.
� Powerful technology systems to manage massive flows
of data, synthesize them into meaningful reports, and recom-
mend courses of action.
� The financial resources to provide solutions such as the
upfront purchase of a shipper’s logistics division, combined with
a willingness to enter into risk and reward-sharing contracts.
The few companies that can meet these requirements are
part of an elite group—less than a dozen worldwide. As large
shippers continue to seek providers who possess LLP-level
capabilities, third-party providers will feel the pressure to
expand the scale of their operations.
EXHIBIT 2
3PL Industry: Consolidation Across Modes and Geographies
U.S. Logistics Market Map:Top 50 Companies
Total = $27 Billion for the Top 50
100%
80%
60%
40%
20%
0%
2001eRevenues($M)
Air/Ocean Asset-Based
Trasportation
Value-Added
Warehouse
Non-Asset-Based
Surface
Transportation
Software
$7.2B $6.7B
International Acquirors
$6.7B $4.5 $2.3B
0% 20% 40% 60% 80% 100%
Danzas AEI
EGL
Fritz
Expeditors
UTi
BAX
Airborne Logistics
Penske
Logistics
Schneider
Dedicated
Ryder
Dedicated
USF
Logistics
JB Hunt
Dedicated
Deutsche Post
US&T
Swift
Werner Dedicated
Other
north
American
Exel
Americas
TNT Logistics/
CTI
Tibbett &
Britten
APL (GATX)
CAT Logistics
USCO
Genco
DSC
Kenco
Standard
Other
NFI
UPS
Logistics
Ryder
Logistics
Menlo
CH
Robinson
FedEx
Logistics
Schneider Logistics
Exel (Mark VII)
Hub Group
Transplace
NFI
Other
i2
Manu-
gistics
Descartes
Manhattan
Associates
EXE
Kuehne & Nagel APL Uti/Standard
Merger
Exel/Mark VII
Merger
Fritz/UPS
Merger

The Vector and Nortel LLP contracts are particularly
important because they may be early adopter models for the
rest of the industry. As Exhibit 3 shows, what the largest
companies of the Fortune 100 do, the rest of the market
tends to follow over time. Just as automotive giants like GM
and Ford led the way toward outsourcing in the early 1990s,
so too may the adoption of LLPs provide a model for mid-
sized companies in the coming decade.
The lead logistics provider movement will create two key
consequences for 3PLs. First, it will increasingly reward
those large companies that can meet the stringent require-
ments demanded by shippers. Second, it will have a ripple
effect on the 3PLs that are forced to serve as subcontractors to
the LLPs. These smaller providers face a distinct risk of margin
compression, technology compliance, reduction in growth
opportunities, and outright termination at the hands of LLPs.
New Game-Changing Technologies
The second major factor driving consolidation is technology.
A growing number of shippers are coming to rely on their
3PLs for sophisticated and costly technology solutions. Many
leading-edge 3PLs specialize in understanding new technolo-
gies and use them to bring substantial value to shippers.
Users increasingly rely on their logistics providers for exper-
tise in complex technologies such as transportation manage-
ment systems (TMS), warehousing management systems
(WMS), supply chain event management (SCEM), and inter-
national trade logistics systems (ITLS).
Shippers can benefit from tapping the knowledge that 3PLs
gain from working with multiple customers. A logistics
provider may purchase a TMS and implement it for 20 differ-
ent accounts. Through this experience, it can gain valuable
expertise on how to get the most productivity out of the tech-
nology. In addition, tech-savvy 3PLs can provide their shippers
with a better understanding of the latest technologies.
Shippers, for their part, can gain powerful cost advantages by
leveraging a service provider’s purchasing power to gain volume
discounts and by paying only for those modules they need. Not
surprisingly, technology has become a key component in many
Fortune 1000 companies’ decision to outsource logistics.
As Exhibit 4 shows, companies that can afford the upfront
investments in technology systems can achieve powerful savings
in the form of operational efficiencies. For a 3PL generating more
than $10 million in revenues, for example, a Web-based, fully-
automated system can cut the cost of a transportation transaction
by over 80 percent. Those 3PLs that cannot afford such technol-
ogy investments will suffer a crippling competitive disadvantage.
Sophisticated systems are becoming a powerful lever for
separating the strong from the weak. I know of one situation
where CH Robinson displaced a mid-sized freight broker by
providing the Fortune 500 customer with a sophisticated
order management system (OMS). The OMS integrated
directly into the customer’s ERP system. Once CH Robinson
had control of the customers’ orders, it was able to route
them wherever it deemed appropriate. Not surprisingly, they
were channeled, more often than not, to CH Robinson inter-
nally for brokerage execution. By the same token, a major fac-
tor in GM’s outsourcing decision was Vector’s ability to pro-
vide global supply chain visibility.
The technology bar will only continue to rise. UPS Logistics,
for example, has made aggressive investments in building out a
logistics and technology-consulting group with a mix of third-
party and proprietary solutions. It helps that UPS has invested
more than $11 billion in technology over the past 10 years. Very
few companies will have the resources and wherewithal to keep
up with these giants and their investments.
The next battleground for technology adoption in logistics
will be the midmarket. Web-based transportation and ware-
housing management systems now enable large 3PL compa-
nies to reach smaller customers. Schneider Logistics provides
a good example of this capability. Historically, this large ser-
vice provider would not do business with midsized companies.
As Schneider’s former Senior Vice President of Business
Development Bob DeVos recounted, “If you were under $50
million in freight spend, I didn’t even take your call.” But now,
with its Web-based SUMIT system in place, Schneider
expects to serve a much broader range of customers more cost
effectively. As the Schneider example shows, technology low-
ers the threshold size of customers that big 3PLs can reach.
This only intensifies the pressures on midsized logistics com-
panies to keep pace with new technology offerings.
Deep-Pocketed Logistics Acquirers
The third driver of consolidation is the emergence of cash-
rich buyers seeking logistics targets. In the last three years
alone, we have seen such major acquisitions as:
� Kuehne & Nagel buying USCO Logistics for $400 million.
� UPS buying Fritz for $500 million.
Less-Penetrated
Higher-Growth
Fully-Penetrated
Slower-Growth
EXHIBIT 3
What GM and Nortel Do Today,
The Midmarket May Do Tomorrow
20%
15%
10%
5%
0
Fortune 401-500
301-400
201-300
101-200
1-100
Five-YearForecastGrowthRate
0% 10% 20% 30% 40% 50% 60% 70% 80%
Source: Armstrong & Associates, BG Strategic Advisors
Percentage of Fortune 500 Companies
Using Outsourcing
As midmarket outsourcing grows, large
logistics companies will pursue aggressively.

� Deutsche Post buying AEI for $1.2 billion.
� Deutsche Post buying Danzas for $1.2 billion.
� TPG buying CTI for $650 million.
� APL buying GATX for $210 million.
In many cases, large European players have pursued U.S.
platforms in order to expand their geographic coverage and
tap into the high-growth U.S. market, which at 20 percent is
expanding at more than double the rates of Europe. For
instance, Kuehne & Nagel (K&N) was seeking a leader in
U.S. value-added warehousing with a focus on the high tech-
nology and telecommunications industries. With USCO,
K&N gained instant scale and credibility in North America.
Similarly, the Dutch post office, TPG, wanted a top position
in automotive logistics and found what they were looking for
in CTI. Global buyers have paid premiums as high as 19
times cash flow in a bid to establish beachheads in the $1
trillion U.S. supply chain market.
North American buyers have tended to pay lower prices
than their European counterparts but still find substantial
value in acquisitions that can provide leadership in comple-
mentary services. For instance, UPS acquired Fritz in order to
bolster its global freight-forwarding network. Conversely, UTi
acquired Standard Logistics in October 2002 to add value-
added warehousing capabilities to its forwarding expertise.
These major acquisitions will only continue. In a rapidly
evolving marketplace, time can be more important than
money. Buyers will continue to be attracted by the ability to
gain new customers, geographies, services, technologies, and
talented managers, which they can realize more quickly
through an acquisition than by organic growth. Further,
wealthy buyers—UPS alone generates $2 billion in annual
cash flow—possess ample resources to fund major invest-
ments in the market.
One particularly interesting trend is the recent emergence of
the private equity firm in this space. These firms tend to invest
in private companies where they see unique opportunities for
growth and profitability. Many private equity firms today are
excited about the logistics services market because they see an
opportunity to (1) consolidate markets that exhibit economies
of scale in marketing, purchasing, and technology; and (2)
accelerate the growth of leading companies in niche markets.
In the last four years, top-tier investment firms have
stepped into the logistics sector. Recent examples include:
� Eos Partners’ investment in NewBreed, a warehousing-
based company that has evolved into sophisticated supply
chain network design and implementation for customers like
the U.S. Postal Service, Verizon Wireless, and Siemens
Medical Solutions.
� GTCR’s investment in Cardinal, a leading transporta-
tion management company focused on dedicated delivery and
logistics consulting for companies like 7-Eleven and Home
Depot.
� Code Hennessy and Simmons’ multiple investments in
May Logistics, a top regional warehousing and logistics com-
pany, and Mail Contractors of America, the largest private
transporter of bulk mail for the U.S. Post Office.
� Heritage Partners’ investment in APX, which provides
package delivery, package sortation, and direct delivery solu-
tions at a postage discount of approximately 40-45 percent of
typical post office rates.
Many of these private-equity-backed logistics companies
are growing revenues and profits at greater than 30 percent
through organic expansion and acquisitions.
We can expect to see more of these investments. With
$120 billion in private equity capital sitting on the sidelines, a
record level of funding exists. My discussions with more than
20 investment firms in the past year suggest that a substantial
amount of that capital will be deployed in the supply chain
marketplace.
This infusion of smart capital from private equity investors
will accelerate the acquisition and consolidation trend. If pri-
vate equity investors commit 5 percent of their total capital to
the sector and continue to grow their portfolio companies at
30 percent annually, within 10 years their companies could
control $64 billion in logistics services. This would amount to
more than 20 percent of the expected market for 2012.
Where will it end? Again, a comparative industry analysis
may help to frame this question. In 10 years, the logistics sec-
tor may end up looking like other, more mature transportation
markets. In 1971, when Fred Smith launched Federal Express,
the parcel industry was extremely fragmented. The top two
players back then represented less than 20 percent of the total
market. Today, FedEx and UPS have successfully consolidated
the parcel market, and combined they own a commanding
80+–percent market share. A similar pattern is likely to emerge
in the 3PL industry.
Implications for 3PLs: The Winners?
Logistics companies that can successfully position their busi-
nesses to benefit from these trends will enjoy an exciting
future. These will be the companies with broad multimodal
capabilities, geographic scope, and technological leadership.
For the majority of companies in this industry, however,
EXHIBIT 4
The Power of Technology to Cut Costs
and Improve Efficiencies
$50
$40
$30
$20
$10
0
Phone/Fax
$42
Source: BGSA analysis. Assumptions: $100,000 fully loaded cost per rep, 240 working
days/year, 10 loads/day phone/fax, 20 loads/day dispatch, 30 loads/day TMS (trad.),
50 loads/day TMS (Web)
Dispatch
System
Cost of a Transportation Transaction, Fully-Loaded
$21
TMS:
Traditional
$14
TMS:
Web-Based
$8

one overriding question emerges: What can you do if you are
not FedEx, UPS, or Deutsche Post? If you’re not a multibil-
lion dollar company, but you do have the size, capabilities,
and ambition to continue profitable growth in midst of this
marketplace, how should you evolve to maximize your oppor-
tunity?
Smart, midsized companies have two main options. First,
they can invest aggressively in niche strategies and technolo-
gies that create differentiation and drive growth. Second, they
can find a “big brother” with deep pockets and position the
business for a merger or sale. Successful models exist for
both options.
NewBreed, Cardinal, May Logistics, MCA, and APX are all
examples of private equity-backed companies that pursued a
differentiated, technology-led strategy and raised capital to
build out their model. All five companies have deployed large
amounts of funding to build sophisticated technology systems
and national networks. Today, each is a formidable competitor
in its target market.
USCO and RoadLink USA represent variations on the sec-
ond option. In USCO’s case, the warehousing company saw an
opportunity to meet its customers’ needs for worldwide solu-
tions and found a global merger partner in Kuehne & Nagel. In
RoadLink USA’s case, several intermodal drayage companies
joined forces to compete more effectively. They are now able
to provide their customers with a single point of contact; supe-
rior tracking, routing, billing, and management systems
through pooled resources; and higher overall service levels.
There is a third option: do nothing. However, while mid-
sized logistics companies may continue to enjoy growth and
profitability for the next two to four years, the longer-term
market dynamics will require continual evolution and re-
investment to ensure differentiation and growth. The status
quo is not a winning choice in the long run.
Implications for 3PL Users: What to Do?
For users, the increasing consolidation of the 3PL industry
has profound implications on choosing and using service
providers. Smart shippers already monitor their logistics part-
ners on the basis of daily operational metrics, such as on-time
delivery rates and costs per ton-mile. But with the landmark
changes in the marketplace, they will need to do even more.
Specifically, they will need to analyze their 3PLs’ strategic
positioning, ability to invest in the future, and viability.
Some new key questions 3PL users should be asking cen-
ter on the following:
� Business needs: How are your company’s needs chang-
ing, and what impact does that have on how you select a
3PL? For example, a company pursuing low-cost manufactur-
ing may choose to source raw materials from Asia, in which
I
n December of 2000, General Motors announced that it was
forming a joint venture with Menlo Logistics called Vector SCM
(supply chain management). This $6 billion startup would han-
dle all of GM’s outsourced logistics, serving as the primary point of
contact for dozens of 3PLs that once worked with GM directly.
Vector was a massive deal—costing more than 600 times the
average logistics-outsourcing contract of $10,000 and represent-
ing nearly 10 percent of the entire $65 billion outsourced logistics
industry to date. GM performed exhaustive analyses of several
major logistics companies before selecting Menlo, a division of
CNF. The two companies now share board seats and equity stakes.
GM’s motivation included the desire to slash dealer car-pur-
chase and ordering cycles from 60 days down to 15. (These effi-
ciencies are highlighted in the accompanying graphic.) The effi-
ciencies are driven by a logistics technology platform known as
“Vector Vision.” With this integrated system, GM is seeking to
create a clearer view of its global logistics operations and a truly
electronic supply chain. The system allows them to perform real-
time modifications at all steps in the car delivery process.
“This will enable us to know exactly what is in transit, identify
a vehicle that matches a customer’s order, and redirect it from its
original destination of a dealer’s inventory to a customer instead,”
explains Harold Kutner, Group Vice President of GM’s Worldwide
Purchasing and Production Control & Logistics.
Vector, and initiatives like it, will continue to push the industry
toward consolidation for several reasons. The Vector mandate is
driven by specialized, sophisticated technological systems that few
companies can afford. In addition, those midsized logistics com-
panies that used to work directly with GM will now be forced into
subcontracting relationships with Vector. Over time, these 3PLs
may see narrower margins, reduced growth opportunities, and the
risk of being switched out of large accounts. As a result, outsourc-
ing arrangements like Vector may have a major ripple effect on
the 3PL industry.
GM’s Big Outsourcing Push
GM's Vector Vision
Source: Line 56, Manufacturing.net
Order Cycle
60 Days
Fragmented
view of their
global logistics
operations
Untimely
inventory
information
Long
delivery
times to
dealers
Order Cycle
Before Vector Vision
With Vector Vision
15 Days
• Accuracte and reliable delivery
• Single system to capture
all EDI (electronic data interchange) links
• Better management of all material and finished
vehicles in the GM pipeline

case the choice of a freight forwarding partner
specializing in Asian-U.S. trade lanes will be a
critical strategic decision. A shipper focused
on economic value-added (EVA) may seek to
maximize high returns off of low capital
invested, which could lead it to select a 3PL
willing and able to purchase its logistics assets
in exchange for a long-term contract.
� Lead logistics provider: Will your busi-
ness be better served by a lead logistics
provider, a series of best-of-breed providers by
geography or service offering, or the status
quo? GM and Nortel concluded that a LLP
would provide accountability, technology-
based visibility solutions to reduce inventory,
and aggressive reductions in the working cap-
ital that would free up hundreds of millions
of dollars in cash. In contrast, others have
found that a strategy of several regional best-
of-breed players provides many of the bene-
fits of an LLP without the risks of complete
dependency on one party.
� Technology: Can your current 3PL(s) keep up with the fast
pace of technology innovation that your business will require
over the next two to four years? Logistics companies are already
expected to provide expertise in such technologies as TMS,
WMS, SCEM, and ITLS systems. As supply chain technology
continues to develop further, shippers will turn to 3PLs for
advice on new categories such as radio-frequency identification
(RFID) tags, which can provide continuous tracking of inventory
at the SKU level. Finally, post-Sept. 11 security requirements,
such as the ocean carrier 24-hour rule, are fueling demand for
new tracking and monitoring systems. Top 3PLs will be expect-
ed to provide clients with expertise on all of these fronts. In
effect, these logistics providers will need to evolve into supply
chain consulting firms that can also provide execution capabili-
ties.
� Scope: Does your 3PL have the scope of services and
locations that you will need in the future? As shippers look
for integrated supply chain solutions, 3PLs are developing
sophisticated service combinations. For example, NFI
Industries is adding contract-manufacturing capabilities to
augment its warehousing and transportation operations.
Jacobson Companies has added not just co-packing but also
temporary staffing services. These value-added services
enable a 3PL to solve larger problems for their clients.
� Capital: Will your 3PL have the resources to reinvest in
continued growth? Standard Logistics, a highly-regarded
regional warehousing company, evaluated its Fortune 500
customer needs and assessed the likely capital requirements
for continued success. Standard concluded that it should
merge with a larger company that could provide the resources
to fund expansion. As shippers demand expanded geographi-
cal coverage and services, 3PLs will be pressed to make the
necessary investments, or alternatively select the right merger
partner, in order to develop these capabili-
ties.
� Viability: Ultimately, does your 3PL have
what it takes to survive and succeed in the
coming era of consolidation? Amidst the
changing customer priorities, increasing com-
petitive intensity, and marketplace volatility,
many companies will be unable to move for-
ward. Will your 3PL be one of them?
For a frightening example of the risks
involved in avoiding these questions, just
look at the recent failures of freight bill
audit and payment companies like STI,
United Traffic Management Systems, and
Computrex. Large companies like Formica,
ATOFINA, Bridgestone/Firestone, Pella,
QVC, and dozens of other Fortune 500 cus-
tomers chose these companies partly on the
basis of low prices. They lost millions of dol-
lars in the ensuing bankruptcies.
The more likely risk is that a shipper will
pick a 3PL that lacks the resources and vision
to evolve in an increasingly dynamic industry. For instance, a
provider that does not make the necessary investments in a
productivity-enhancing TMS, WMS, or SCEM system may
place its customers at a competitive disadvantage. Similarly, a
shipper may choose a 3PL that is unwilling or unable to
expand into new geographies and needed service offerings. In
the long run, these strategic factors can dwarf operational met-
rics in terms of their impact on a shipper’s business.
Asking the Hard Questions
The 3PL market today stands at a crossroads. As shippers
demand broader solutions, technology companies bring inno-
vations to market, and a flood of capital chases differentiated
companies, the pace of change promises only to accelerate.
These dynamics will pose major challenges and opportunities
to both users and service providers, demanding the attention
of all supply chain professionals.
To emerge as winners, 3PLs will need to carve out a dif-
ferentiated square on the chessboard. Consolidation is an
unmistakable reality. The choice—raise capital to pursue a
niche strategy, sell to a larger player, or harvest the busi-
ness—is not easy. However, just as UPS and FedEx achieved
domination in the once-fragmented parcel industry, today’s
logistics providers who pick a unique strategy and make the
necessary investments can be big winners going forward.
Shippers also face important decisions. Should you pick a
global logistics partner, a series of regional 3PLs, or a matrix of
best-of-breed providers by service offering? Does your 3PL
understand what drives value in your business? Is your partner
well positioned to succeed amidst the changing marketplace?
Shippers who understand changing market requirements and
pick winning 3PLs can develop superior supply chain strate-
gies that deliver a powerful competitive edge.
Those 3PLs
that cannot
afford
investments in
sophisticated
technology will
suffer a crippling
competitive
disadvantage.

Logistics Acquisitions:
Who Says Elephants Can’t Dance?
By Benjamin Gordon
In 1883, three workers at the Canadian Pacific Railways (CP),
William McCardell, Thomas McCardell and Frank McCabe,
discovered a series of hot springs in the Canadian Rockies. The
railway recognized the tourism potential amidst the soothing
waters and dramatic sights of the Rockies. Shortly thereafter, the
CP established the Banff Springs Hotel, at its time one of the finest
hotel destinations in the world. The CP continued to build a series
of hotels along its main line, and quickly established Banff and the
Canadian Rockies as a premier tourist destination. Meanwhile,
demand for Canada’s first transcontinental railroad continued
to grow. Now, partly as the result of creative initiatives such as
the development of Banff and the Rockies, the CP stands at 236
billion ton-miles, covers 41 million miles of track, and generates
over $4 billion of revenue and $413 million of net profit.
The same spirit of innovation drives other transportation and
logistics firms to seek new opportunities. Today, the frontier lies at
the intersection of new services. Mega-mergers like the proposed
Deutsche Post-Exel transaction, which would create the largest
logistics firm worldwide, have captured the media’s attention, but
are in fact only the tip of the iceberg. Throughout the market, we
are witnessing a consolidation of logistics services, as firms seek to
respond to three core trends: (1) customer demand for integrated
services, (2) new technologies that enable firms to enter new
markets, and (3) outside capital pouring into the logistics arena.
First, customer demand continues to expand for integrated
services. Much has been made of GM’s four-year-old decision
to outsource all $6 billion of its logistics needs to Menlo, in the
largest one-stop-shop contract in logistics history. While such large
deals have captured the attention of the media, the real action
is occurring under the radar screen. Firms like Kimberly-Clark,
which at one point handled over 60 3PL relationships, are looking
to reduce their logistics suppliers to no more than ten. While this
trend lacks the drama of the “4PL” movement, it is having a much
more significant impact in the mid-market, where the majority of
logistics firms operate.
Second, new technologies are enabling firms to penetrate new
customer and market segments. Companies that invest aggressively
in such technologies are gaining corresponding benefits.
For instance, Schneider Logistics invested over $70 million,
cumulatively, over the past ten years. The result, a web-based
transportation management system called mySumit, has enabled
Schneider to win business within customers spending less than $50
million on transportation, which was not previously a core market
for the company. New technology investments are changing the
competitive landscape.
Third, outside capital is pouring into the market, in search
of the best companies in the logistics sector. In the past year,
we have witnessed such landmark deals as the Welsh Carson
acquisition of Ozburn-Hessey, the Warburg Pincus acquisition of
NewBreed, and the PWC Logistics acquisition of GeoLogistics.*
All represent nine-figure transactions that were consummated
at strong valuations – generally ranging from seven to twelve
times operating profit, or EBITDA. In addition, we have seen
a number of “tuck-in acquisitions,” such as PBB’s acquisition of
Unicity, PWC’s acquisition of Trans-Link, PWC’s acquisition
of TransOceanic, and various others. This flurry of acquisitions
reflects strong strategic demand for high-quality logistics firms.
They also showcase the new role private equity firms are playing
in the logistics sector.
Smarttransportationandlogisticscompanieshavealwaysstood
at the crossroads of commerce and innovation.
Benjamin Gordon is Managing Director of BG Strategic Advisors,Inc. His firm provides investment
banking and strategy consulting services to companies in the logistics and supply chain industry.
For more information,please visit www.BGStrategicAdvisors.com,email Ben@BGStrategicAdvisors.
com,or contact Ben at (561) 655-6677.

• Geographic converge: PBB Global Logistics recently
acquired Unicity Integrated Logistics and Unicity Customs
Services. A primary reason for this move was to strengthen PBB’s
position as a leading cross-border specialist, and to concentrate
on the 10% US-Canada cross-border transportation growth.
Similarly, Yellow’s acquisition of GPS reflects their view of the
importance of the Asia-US trade lane. Meanwhile, European
firms continue to look for US opportunities, attracted by the
relatively high growth potential in North America: 15% annual
growth, versus 2% in Europe.
• Serviceconvergence: The most common trend in M&A over
the past five years has been the convergence of warehousing and
global freight forwarding. Transactions such as Kuehne & Nagel-
USCO, UTi-Standard, UTi-Unigistix, and APL-GATX reflect
this pattern. This year, PWC Logistics’ acquisition of Trans-Link
and TransOceanic showcase the desire of a regional warehousing
firm to transform into a global multi-service solutions provider.
• Increasedfinancialinterest: Privateequityfirmsarepouring
capital into the logistics sector because they see a compelling
opportunity to generate an above-market financial return. For
instance, many firms have taken note of the outstanding returns
that Eos achieved with Pacer, or Oak Hill with GATX, or Great
Hill with SmartMail. Similarly, because the debt markets have
been particularly eager to lend to private equity firms in large
logistics deals, these companies are able to reduce their effective
cost of capital in a transaction.
In light of the recent surge in private equity logistics interest, an
example showcasing the financial mechanics may be in order.
Let’s suppose that “ABC Logistics,” a well-run, $100 million
revenue, $10 million EBITDA company, agrees to consider
a sale. Historically, such a firm might have been valued at 5-7
times EBITDA, or $50-70 million. However, in light of the high
levels of demand for such high-quality companies, ABC Logistics
may be able to fetch the premium price of 8x EBITDA, or $80
million. In the event that the purchaser is a private equity firm,
he or she will rely upon the debt markets to finance a portion of
the deal. In such a case, the firm may be able to support a debt
level equal to 5x EBITDA, or $50 million. What this means is
that the private equity firm will borrow $50 million and finance
the remaining $30 million with equity. Then, if the company uses
its operating cash flow to pay down the debt by $10 million per
year, in five years it should be virtually debt-free. Thus, even if the
company “only” grows at the relatively slow rate of 10%, which is
slower than the 14% rate which BG Strategic Advisors forecasts
for the outsourced logistics market in the coming five years, then
in five years the private equity firm could grow its equity value by
a much higher rate.
The below table illustrates this point. Let’s assume that, post-
acquisition, ABC Logistics grows its revenues and EBITDA at
10% annually. In addition, ABC Logistics pays down its debt at
$10 million per year, resulting in a virtually debt-free company in
five years. Finally, because the market pays a premium for larger
category leaders in logistics, ABC can expect to achieve a slightly
higher valuation multiple of ten times EBITDA upon its exit in
five years. As a result, ABC’s equity value grows from $30 million
in year zero to $161 million in year five, for a whopping 40%
annual return!
What does all of this mean for your logistics business?
If you are a large, innovative leader in transportation and logistics, you may already be looking at acquisitions to expand into new
services, in order to meet this market need. If you are a mid-sized, successful logistics firm, the chances are that you have already
received a number of unsolicited bids for your business. In either event, now is a good time to develop a strategy for how to succeed
amidst this rapidly-evolving marketplace.
In closing, to paraphrase Lou Gerstner, who says elephants can’t dance? Just as the Canadian Pacific Railroad demonstrated in 1883,
large firms with a focus on growth will continue to innovate. In the 19th century, innovation in transportation may have consisted of
entering new markets to generate demand for core asset-based services. Today, in the 21st century, the cutting edge of innovation lies
in blending services to produce integrated solutions.
In the sequel to this column, we will outline specific strategies for success that both large and mid-sized logistics firms may consider.
We can disaggregate the resulting mergers and acquisitions (M&A) trend into three core components:
ABC Logistics Buyout Example
Year Zero Year One YearTwo YearThree Year Four Year Five Growth Rate
Revenues 100 110 121 133 146 161 10%
EBITDA 10.0 11.0 12.1 13.3 14.6 16.1
Valuation at 8x EBITDA 80.0 88.0 96.8
Valuation at 9x EBITDA 119.8 131.8
Valuation at 10x EBITDA 161.1
Debt 50 40 30 20 10 0
EquityValue 30 48.0 66.8 99.8 121.8 161.1 40%
* Note:BG Strategic Advisors has worked with all of these firms,either on the transactions mentioned above or on other projects,
and may continue to work with these firms from time to time.

BG Strategic Advisors
Supply Chain 2007 Conference
The Industry’s Only CEO-Level Conference
Focused on All Segments of the Supply Chain
BG STRATEGIC ADVISORS, INC.
44 Cocoanut Row,Suite A-114
Palm Beach,FL 33480
Headquarters:(561) 655-6677
Fax:(617) 812-5935
Email:info@BGstrategicadvisors.com
www.bgstrategicadvisors.com/conference2007/
January 17–19,2007
The Breakers Hotel
Palm Beach,Florida

News & Commentary: BG Strategic Advisors and Benjamin Gordon on Logistics

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News & Commentary: BG Strategic Advisors and Benjamin Gordon on Logistics